High pace of change in Vattenfall

I have now been CEO of Vattenfall for more than a year and can affirm that the high pace of change I encountered when I started has not slowed during the past year – neither for our company nor for the industry as a whole. On the contrary.

A paradigm shift is currently under way in which large-scale electricity generation and the traditional model for electricity distribution are being challenged by more decentralised and individualised solutions. Customers are becoming an increasingly integrated part of the value chain, which is a fantastic development. While this is presenting challenges to today's conventional energy companies, new business opportunities are also being created. Added to this is the current, accelerating transformation towards an entirely renewable energy system. This is a shift that we support to the highest degree, but which is also a challenge to achieve with today's overcapacity and low energy prices.

Partner with simple and innovative energy solutions

In 2015 we further refined our strategy with the goal to be a leader in this transformation. The sustainability perspective continues to permeate Vattenfall’s strategic objectives: Leading towards Sustainable Consumption, Leading towards Sustainable Production, High Performing Operations, and Empowered and Engaged Organisation. Leading towards Sustainable Consumption – where we work together with customers towards the goal of providing the energy-smart solutions that we see are wanted by today’s and tomorrow’s customers. In fact, Vattenfall expanded its customer base during the year. Leading towards Sustainable Production – where we are transforming our production portfolio primarily towards low CO2 -emitting production and over time contributing to an entirely renewable energy system spearheaded by the vision that Vattenfall will be a climate neutral company by 2050. Empowered and Engaged Organisation – which is rooted in our company culture and focus on the customer, where safety, high-performing people and competent leaders are natural features. High Performing Operations – which entails that we, through continuous reviews of our cost structure and investment plan, ensure our adaptation to today’s considerably lower energy prices and maintain satisfactory financial key ratios at the same time that sustainability is an integral part of the entire value chain. With a changed production mix we are achieving more diversified risk exposure to future movements in energy prices.

The year was characterised by continued transformation. For our customers this has entailed investments in customercentric products and services, including system solutions for energy efficiency and e-mobility. We have also continued to take actions to strengthen our balance sheet, whereby we are currently carrying out our cost-cutting programme for 2015–2016, conducting a critical review of investments, and at the same time pursuing our strategy by divesting the parts of the portfolio that are not regarded as core businesses in the new Vattenfall. Our portfolio transformation is a direct consequence of our strategy, which is grounded in the shift to an entirely new energy system. In Denmark, through the sale of a combined heat and power station in northern Jutland, we have divested our last fossil-based production plant in the country. Vattenfall's production mix will change dramatically if we carry out the planned divestment of our lignite operations. This would result in a production mix in which specific carbon emissions are among the lowest among our peer energy companies in Europe.

Vattenfall is developing new business opportunities in several important energy solutions. Our first UK solar power project, with a capacity of 5 MW and an annual output sufficient to supply 1,441 British households, will be operational at the end of March 2016. Our investments in wind power have made us not only a major operator of onshore wind power generation in northern Europe, but also the second-largest producer of offshore wind power in the world – something we can be very proud about.

In 2015 Vattenfall installed 445 MW of renewable capacity. We inaugurated the DanTysk offshore wind farm in Germany and the Clashindarroch onshore wind farm in the UK. A number of measures to reduce our energy need helped us exceed the year's energy efficiency improvement target of 440 GWh and achieve a reduction by 1,066 GWh. Vattenfall's CO2 emissions increased in 2015, mainly owing to the commissioning of the Moorburg coal-fired plant in Hamburg, Germany. While the decision to invest in this plant was made under vastly different market conditions than what we are seeing now, the power plant is today nevertheless one of the most efficient in Europe.

Vattenfall supports and adheres to numerous international guidelines and standards for sustainability in its operations. As an example, we support the UN Global Compact's principles and through this have taken a clear stance on issues such as human rights, social responsibility and environmental responsibility.

As a company we can be satisfied with what we have achieved in the area of sustainability during the year, at the same time that much work remains. I am convinced that our strategy will drive our current transformation and development at an increasingly faster pace towards a long-term sustainable company.

Consequences of changed market conditions

Our biggest challenge in 2015 continued to be the impact that today's very low electricity prices are having on Vattenfall's profitability and on the valuation of our assets. Unfortunately, combined with new regulatory requirements this led to the recognition of further impairment losses during the summer. We ascertained that Germany's decision to gradually cut its carbon emissions created an elevated risk for the value of our lignite assets, compelling us to recognise impairment of these as a result. Added to this, the investments needed to maintain current safety standards at our Swedish nuclear plants entailed that we no longer saw conditions for profitable power generation and were therefore forced to decide on the early closure of two reactors, Ringhals 1 and 2. Continued falling prices and a tax on installed nuclear capacity corresponding to 7 öre (SEK 0.07) per kilowatt-hour have put Swedish nuclear power in a critical situation. The remaining reactors will be needed for many years into the future if we are to be able to shift to an entirely renewable energy system in a responsible and cost-effective manner. Also hydro power, which is the foundation of our long-term power generation, is now being hurt by the combination of low prices and very high taxes.

Despite continued successful adjustment of our cost structure and cost savings of approximately 30% over the last five years compared with the cost base in 2010, the impairment losses recognised during the year once again led to a negative result after tax for the year as a whole. At the same time, during the year we managed to successfully broaden our partnerships with strategic investors to also include financial investors. Today four wind farms in Sweden are jointly owned with the insurance company Skandia, and one of our largest wind farms – Ormonde in the UK – is now jointly owned with AMF, a Swedish pension fund. By entering into partnerships for our growth investments we attain higher investment capacity despite the tough market conditions and can further leverage our expertise to build and operate wind farms.

Outlook for 2016 and the path forward

The climate agreement reached at COP21 in Paris was fundamental for establishing the political framework needed for energy systems of the future. A central starting point, of course, is the overarching commitment to limit the increase in global warming to 2°C as well as a joint ambition to limit the increase to 1.5°C. An important aspect for the energy sector is that the agreement may spur development of the EU Emissions Trading System (EU ETS), with ties to other trading systems.

The ongoing change of our energy system is dramatic – but also very exciting. The entire system will be transformed, where the roles between producers and customers become more diffuse and where entirely new business opportunities will arise. I am confident, however, that the foundation that we have now laid in our new strategy and the adaptations we have made and must continue to make will leave us well prepared to secure our position as a reliable partner to our customers and society. Vattenfall will offer innovative energy solutions, be among the leaders in sustainable generation, and at the same time guarantee secure and cost-effective electricity and heat in the new energy landscape.

Magnus Hall
President and CEO

Last updated: 2016-11-22 16:27